In an industry characterized by its miniscule margins and high operating leverage, Winn-Dixie (NYSE: WINN ) finds itself in a pretty good position to outperform after trailing rivals for years. The grocery chain emerged from bankruptcy at the end of 2006 -- debt free, 350 stores smaller, and with a ton of cash. However, Winn-Dixie's most recent quarter shows a company still plodding along with little improvement while spending a lot of its cash along the way.
The beleaguered grocer did beat Wall Street estimates slightly on the top and bottom line, though a loss of only $0.26 versus an expected $0.28 loss is really nothing to get too excited about, especially compared with last year when the company lost only $0.04 a share. The slight beat was also negated by some pretty downbeat commentary by management, as well as a lowering of margin and earnings expectations for the remainder of the year. The company's balance sheet remains strong, but with cash bleeding away, time is running out fairly quickly for management to turn this franchise around.
An industry in turmoil
Winn-Dixie is certainly not alone in its struggles. This is an industry that is being squeezed on just about every side of its operations. Today, most pervasive is the rapid rise in food inflation that Winn-Dixie and others are witnessing. While the grocer had some success late in the year passing along some costs and cutting down on promotions, CEO Peter Lynch said as prices continue to rise, his stores are at the mercy of competitors and consumers who are increasingly pressured as other costs, like gas, are also rising.
Therein lies the fundamental problem with the industry -- but more specifically within the company. The game of chicken to see which grocery chain will raise prices first has shrunken already-small margins, and it appears that Lynch and his team really have no answers to deal with it. Management certainly can't control inflation or the fact that the big discounters like Wal-Mart (NYSE: WMT ) , Costco (Nasdaq: COST ) , and BJ's (NYSE: BJS ) are slowly eating away at grocery market share.
Still a bargain-bin stock?
Winn-Dixie has remained on my watchlist because of its strong balance sheet and a valuation that prices shares of the grocer at a significant discount to its peers.
Price / Tangible Book Value
|SUPERVALU (NYSE: SVU )||4.7||NM|
|Safeway (NYSE: SWY )||5.3||1.8|
|Kroger (NYSE: KR )||5.9||3.6|
NM = not meaningful.
The discount remains, but the balance sheet strength is diminishing. Winn-Dixie still has $108 million in cash and no long-term debt, but just six months ago, its cash position was $152 million. The company has also been in the midst of a large-scale store improvement and renovation program that has been eating capital. While management has been bullish on the results, the positive effect has yet to be seen in the company's earnings. As a result, management announced that it would be postponing most of its remaining 2011 store renovations, which will result in a $26 million decline in 2011 capital expenditures.
Management could use this cash to repurchase shares, as many investors have been clamoring for, but it may be best to continue to maintain this rainy day fund as the weather doesn't look like it will be getting better anytime soon. The stock is still significantly cheaper than its peers, and as the chart above shows, the potential upside is significant if management can turn the company's fortunes around.
While shares are clearly cheap compared with those of its peers, the company's continued inability to post better results show that it may be best to leave this one in the bargain bin. I am starting to get the feeling that it might still be there when I come back to check on it in a few weeks.